Analysis Of The Impact Of ESG Rating Change On Stock Excess Return

In recent years,with the deepening development of China’s green economy,high-quality development models such as the dual carbon economy and intelligent manufacturing have gradually become the craze of the day.The popularity of the concept of green and sustainable development has led to the growing influence of non-financial indicators on A-share companies,which are gradually becoming a focus of investors’ attention.ESG,based on traditional financial indicators,has become a new tool to measure corporate value by combining diversified indicators related to corporate sustainability,such as environmental protection,social responsibility and corporate governance.And ESG investment,as an emerging and important research topic that fits with the sustainable development of socialist science,has become a top priority for the study of its impact on investment in financial markets.However,due to the late introduction of ESG concept in China,the development of ESG in China’s financial market is still in the nascent stage.Although a lot of domestic literature has begun to study the relationship between ESG and corporate financial performance,not much research has been conducted on the relationship between changes in ESG ratings and stock excess returns.In view of this,this paper investigates the relationship between changes in corporate ESG ratings and stock excess returns using the time-calendar method.First,portfolios are constructed according to the different directions of changes in corporate ESG ratings,and the excess returns of ESG portfolios are tested using the CAPM model,the Carhart four-factor model,and the Fama-French six-factor model.And according to the different initial ratings of the companies,the companies are divided into ESG leading companies and ESG lagging companies,and continue to use the factor model to detect the impact of different initial ESG ratings on the excess returns.Then,the relationship between the magnitude of change in firm ESG ratings and portfolio returns is tested empirically through fixed-effects panel regression models,and finally,the return forecasting ability of the portfolios is tested.Finally,the paper draws the following four conclusions:(1)While rising ESG ratings have an asymmetric impact on excess returns,downgrades are always detrimental to stock performance,and investing in a firm will result in below-market returns for investors if its ESG rating declines.(2)ESG leader firms are more significantly affected by rating changes than laggard firms.(3)The greater the decline in a firm’s ESG rating,the worse the return performance.(4)Changes in a firm’s current ESG rating have some predictive power for short-and medium-term stock returns,but no significant predictive power for long-term stock returns.Based on the research findings,this paper puts forward the following suggestions: first,institutional investors should pay attention to ESG performance of listed companies and include ESG upgrading and downgrading in the assessment index of investment decisions;other investors should also have a correct understanding of ESG concept and avoid such stocks once the ESG rating of enterprises is downgraded when they actually invest;second,enterprises should strive to improve ESG performance and increase ESG Second,enterprises should make efforts to improve ESG performance and increase ESG investment,actively disclose relevant information to investors and ensure that the disclosed information is true and effective;Third,government agencies should improve relevant policies and regulations,guide listed companies to fully disclose ESG information in compliance with regulations,and encourage listed companies to actively and voluntarily make disclosure.Unify the disclosure caliber and establish reward and punishment mechanisms.Also focus on investor education,strengthen the publicity of ESG-related concepts,and guide investors to understand ESG correctly.